by John Q on September 15, 2008
In the comments to my last post, reader Peter Schaeffer provides exactly what I asked for: a breakdown of the discrepancy between 30 per cent growth in US household income over the last 40 years and 117 per cent growth in income per person. In addition to the factors I’d mentioned (falling household size and growing inequality) Schaeffer notes two more: the fact that GDP has grown faster than national income and the fact that prices faced by households (the CPI-U-RS) have risen faster than the GDP deflator. He provides the details to show that this fully explains the discrepancy.
What should we make of this. As far as the situation of the average American is concerned, the only correction we need to make to the household income figures is to correct for changes in household size. That makes the increase over the last 40 years about 63 per cent, or an annual growth rate of 1.2 per cent. By contrast, the 117 per cent growth in GDP per person implies a rate of just under 2.0 per cent. So, changes in GDP per person (let alone changes in total GDP) are essentially irrelevant as a guide to how the average household is doing.
And of course, the poor have done much worse. Household incomes for the bottom quintile have barely moved for decades. Growth in consumption has been driven largely by increasing access to debt, a process that now looks to have run out of road. That would seem to indicate a looming social crisis. But the coming election will still turn on whether Obama called Palin a pig.
by John Q on September 13, 2008
I was at a seminar the other week on inequality in US household income, and I asked the speaker about something that’s puzzled me for a while. I didn’t really get an answer, so rather than do a lot of work myself, I thought I’d try this crowdsourcing all the cool kids are talking about. Here’s the puzzle.
Over the past 40 years or so, real median US household income has risen by about 30 per cent.
US Household income 1965-2005
but real US GDP per person has more than doubled. How can this be ?
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by John Q on September 8, 2008
Measured by the dollar amount involved, the nationalisation of the mortgage guarantors Fannie Mae and Freddie Mac, announced today by the Bush Administration, is the largest in history. No less than $5 trillion of assets and obligations have been taken over by the US government in one hit.
Of course, that debt had long been regarded as having an implicit government guarantee and the companies involved were quangos (in the original sense of quasi-NGOs) rather than genuine private firms. Fannie was a government agency privatised in the 1960s, and Freddie was created to provide competiion for Fannie. So even though the US government will now guarantee virtually all new mortgages, this is more an admission of existing reality than a big step towards socialism.
The significance of the event is not in the marginal change in the status of Fannie and Freddie from quasi-private to quasi-public, but in the abandonment of the pretence that the normal operations of financial markets are capable of cleaning up the mess they have created, even with the liberal helpings of public money that have already been dished out.
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by Chris Bertram on September 2, 2008
Obviously, this shouldn’t be taken too, indeed at all, seriously, but I did a little playing around to try to discover which nation did best at the Olympics. I’m told (or at least, I read in the _Times_ the other day) that some US commentators favour an assessment based on total medals won divided by population. Well they would, wouldn’t they? But obviously, some medals are worth more than others and you want to take some account of relative economic development. So here’s what I did: I assigned 7 points for gold, 3 for silver and 1 for bronze and then divided by Gross National Income in $billion (PPP adjusted) as given by the Nationmaster site. GNI is going to vary positively by population and by economic developement, thereby capturing both relevant facts. The GNI figures are probably not completely accurate, and I had to plug in a figure for Cuba. I also discarded all nations that scored less than 50 points (there’s a pretty big an convenient gap below that score). The result is in the table below. So well done Jamaica, and, among the OECD countries, Australia. 
by John Q on August 22, 2008
David Weisbach and Cass Sunstein (h/t Nicholas Gruen) have written a piece for the AEI Center for Regulatory and Market Studies[1] weighing into the debate about climate change and discounting, promising “A Guide for the Perplexed”. But their treatment of the topic is only like to add to the perplexity of anyone interested in resolving the issues.
Shorter Weisbach-Sunstein: If ethical considerations suggest that the most appropriate discount rate is 1.4 per cent, but the market rate of return is 5.5 per cent, it’s best to use the 5.5 per cent rate in evaluating climate change policies.
As a hypothetical statement this is broadly correct. Weisbach and Sunstein illustrate the point by considering someone choosing between an investment yielding a 10 per cent increase in value over 2 years and the alternative of putting money in the bank at 6 per cent, which is clearly superior.
The problems arise for the reader who tries to plug in real numbers. According to today’s New York Times the rate of interest on 10-year Treasury bonds is 3.84 per cent. Assuming (optimistically) that the Fed manages to hold inflation at 2.5 per cent over the next years, that’s a real rate of 1.34 per cent, almost exactly equal the rate quoted as justified on ethical grounds.
So to restate Weisbach and Sunstein with real numbers:If ethical considerations suggest that the most appropriate discount rate is 1.4 per cent, but the market rate of return is 1.3 per cent, it doesn’t matter which one you choose.
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by Kieran Healy on August 9, 2008
This morning I was out for a walk and I found a twenty dollar bill lying in the street.
by Maria on August 6, 2008
Interesting thought piece in today’s Irish Times; ‘what will life be like for the average Irish middle class family in 2050?’. It is inspired by JM Keynes’ 1930 ‘Economic Possibilities for our Grandchildren’.
It’s low on specifics but not remotely tech-evangelist, which makes a nice change. It’s clear we won’t all be driving around in space ships and commuting to and from Mars (energy and everything else being too dear). Interestingly, it predicts Ireland will be physically smaller because of climate change, and also more densely populated. One topic it doesn’t deal with is changes to income distribution.
I have a feeling that with higher prices and the predicted period of economic ‘adjustment’ we can look forward to, the gap between rich and poor Irish/Europeans may come to more closely resemble that in the US. (Bearing in mind that Ireland’s income distribution is probably somewhere between continental European and the US. But I’m not an economist and the writer, Stephen Kinsella, is. In any case, his policy prescriptions call for government actions to help the middle class that might mitigate overall income inequality:
“Well, first, they need to help me save. The more the middle class saves, long term, the more their children and their children’s children will benefit. Second, they need to make sure my children survive, by providing a health service which will make the chances of this more likely. Third, the Government must ensure the natural environment my grandchildren inhabit is as conducive to their happiness as possible, while allowing service sectoral growth and general economic development to maximise the economic possibilities for my grandchildren.”
(By the way, kudos to the Irish Times for finally pulling down the paywall.)
by John Q on August 5, 2008
The Wall Street Journal has a fascinating article about how corporations like Intel are loading up their general pension funds with obligations to pay massive “supplemental” benefits to senior executives. It’s partly a tax dodge, and partly an example of what Jacob Hacker has called the great risk shift. The extra liabilities increase the risk that the fund will fail, but the top brass can be protected against this eventuality with a trust fund, while the rank and file get to take their chances.
Update To clarify, in response to comments, the pension entitlements of ordinary workers are supposed to be protected by the government through Pension Benefit Guaranty Corporation, and to the extent that this works as expected, risk is shifted to the PBGC rather than to workers. But as both the WSJ story and the discussion below make clear, things don’t always work as planned. Some benefits paid to ordinary workers turn out to be classed as supplemental and therefore lost when the scheme fails.
by John Q on July 31, 2008
by John Q on July 31, 2008
I’m planning a further post about the notion of ‘creative capitalism’, but before I get on to it, I thought it might be useful to clear up some of the confusion surrounding the alternative view, that managers have a ‘fiduciary obligation’ to act solely in the interests of shareholders, reflected in debate at my blog, at CT here (including this and here) and at the Creative Capitalism blog.
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by Daniel on July 25, 2008
Further to John’s post (on which this should have been a comment, but it growed), I have a real bee in my bonnet about the claim made by Richard Posner that ” The managers of corporations have a fiduciary duty to maximize corporate profits”. It raises a whole load of topics relevant to plenty of my favourite economic hobby-horses as soon as you start to look remotely critically at what the seemingly simple phrase “maximise corporate profits” actually means anyway.
Pretending not to understand the meanings of common English phrases is a stock tactic for creating the impression of profundity (cf philosophers, who are always pretending not to understand the meaning of words like “is”, “would” and “must”). But sometimes you have to do it – my view is that in any view of the world more complicated than a very elementary blackboard model, the phrase “maximise profits” can’t be unpacked into a coherent decision rule which rules out any of the things which Posner talks as if it does. First, let’s look at some things that it can’t possibly mean.
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by John Q on July 24, 2008
by John Q on July 10, 2008
Nationalization, that is. In this piece on doomsday scenarios for Fannie Mae and Freddie Mac (H/T Calculated Risk) the cutely named and quasi-private mortgage packagers and guarantors, Katie Benner says
So what might it look like if the government had to lend a hand? Outright nationalization is an unlikely option given that neither the current administration nor the presidential candidates could afford to support such a move in an election year.
but goes on to imply that the likely alternatives could be far more costly, citing a Standard & Poors estimate of a trillion dollar cost to taxpayers, and possible loss of the US government’s AAA rating. Agency ratings aren’ t reliable indicators, but the US government has been in the category of issuers who are assumed to be exempt from scrutiny. A change in this status would be a huge problem for a big debtor like the US.
Either a bailout or a nationalization of Fannie and Freddie would make the Northern Rock fiasco in the UK pale into insignificance. The Northern Rock case shows that a policy towards financial enterprises in which both failure and nationalization are regarded as unthinkable cannot be sustained. The shareholders of these companies have been happy to accept the higher returns associated with an implicit government guarantee and they should pay the price when the guarantee is needed.
by Chris Bertram on July 10, 2008
Here’s “a sentence”:http://www.economist.com/opinion/displaystory.cfm?story_id=11670314 from a leader in _The Economist_ :
bq. If Mr Brown had fattened the public finances during the good times, *as he should have done* [emphasis added] , then this [mounting a fiscal rescue package] would be no bad thing.
Now what Brown actually did during the good times was to invest in public services that had been underinvested in for decades: fixing the roof whilst the sun was shining. Maybe some of that money was unwisely spent (I don’t doubt it). Here’s what I’m interested in: did the _Economist_ call, back then, for the use of tax revenues to “fatten the public finances”? Or did they favour lower taxes?
by John Q on July 5, 2008
I’ve had this post in mind for quite a while, and never got in finished to my satisfaction, but it’s been stimulated to a significant extent by reading Clay Shirky, so I thought I’d pop it up now, somewhat half-baked while he’s visiting here at CT.
I’ve updated it a bit, incorporating some comments and responding to others
The biggest single question in political economy is whether and to what extent we can achieve social equality without sacrificing other goods like liberty and prosperity. Neoclassical economics (a project in which I’m a participant) begins with models which imply that, with competitive markets, all factors of production will earn their marginal product. This in turn implies that any intervention that shifts wages or returns to capital away from their marginal product must imply a loss in aggregate income.
There are all sorts of problems with this result, and particularly with simple-minded applications of it, which are legion. For a start, it can only ever be true at the margin – everyone in a modern economy depends for their income on the centuries of effort that have gone into creating that economy. There are also plenty of technical issues which have been debated for a long time, such as the famous capital controversy. I’m particularly interested with questions relating to whether the standard result, derived under the assumption of certainty and perfect information, works under conditions of uncertainty (in my view, much of the activity of the social democratic welfare state can be explained as a form of collective risk management).
Still, in an economy that fits the standard model of lots of competing firms, all operating in a region where constant returns to scale apply, the standard neoclassical analysis has considerable force. But the growing part of the economy centred on the Internet doesn’t fit this model at all. The Internet is a network and the economies of networks are different, in critical ways, from those of the standard neoclassical model.
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